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International Businesses, Tax & Assurance Guidance

China’s Reduced VAT (Value Added Tax) Rates

Posted on August 28, 2018 by

Rob Cheyne

Nina Wang

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Effective as of May 1, 2018, Value Added Tax (VAT) rates in China have been lowered, which is expected to save businesses 240 billion yuan this year alone. Additionally, the criteria for businesses to be taxed as small-scale VAT taxpayers has been broadened. It is important for Chinese companies, and those doing business in China, to take action and determine how these VAT updates may impact their operations.

China previously had a tax system that utilized two different types of tax—Value Added Tax (VAT) and Business Tax (BT). These two taxes formerly coexisted, with VAT applying to goods and BT applying to services. BT was a type of turnover tax imposed on businesses that resulted in a higher tax burden than VAT. In comparison, VAT is collected by businesses and the tax burden ultimately falls on consumers, which results in a more favorable tax for businesses. Therefore, this prior system disproportionately taxed services and discouraged the development of the services sector.

This all changed with the VAT reform, which removed all Business Taxes and replaced them with Value Added Taxes. The VAT pilot was initially launched in 2012 in Shanghai, and was expanded throughout all of mainland China on May 1, 2016. VAT now applies to all service industries including construction, real estate, hospitality, health care, lifestyle, and financial and consumer services, which had all previously been taxed using BT.

The goal behind the VAT reform was to stimulate economic growth, innovation, and entrepreneurship by lessening the tax burden on businesses. The Chinese government is also attempting to transition towards a more service-oriented economy. Thus far, VAT reform appears to be successful. The service sector is growing at a higher rate than any other part of China’s economy. Furthermore, from the start of the launch in May 2016 to June 2017, taxes paid by businesses were decreased by approximately 850 billion yuan. Time will tell if long-term economic growth will continue due to VAT reform and China’s new VAT updates.

New VAT Rates
Taxpayers who were originally in the 17 and 11 percent VAT tax brackets will now be taxed at 16 and 10 percent, respectively. Taxpayers at the 6 percent tax bracket will remain unchanged.

The chart below summarizes specific taxable activities and the change in their VAT rates:

Taxable Activities Old VAT Rate New VAT Rate
Sale of general goods, processing, repair and replacement services, leasing of tangible and moveable assets. 17% 16%
Sales of specified goods, transportation, postal services, basic telecom services, construction, leasing and sales of land or immovable property. 11% 10%
Financial services, consulting, value-added telecom services, lifestyle services, sales of intangible assets. 6% 6%

For companies that sell products from China to other countries, the export VAT refund rate has been decreased from 16 percent to 10 percent in accordance with the reduction in VAT rates.

New Small-Scale VAT Taxpayer Requirements
China previously had three distinct tiers of small-scale VAT taxpayers, which was based on the amount of sales in each industry. The manufacturing sector was eligible if their annual sales were less than RMB 500,000. The threshold was RMB 800,000 and RMB five million for the trading sector and service sector, respectively.

Now, there is only one category of small-scale VAT taxpayers, defined as those with sales less than RMB 5 million for any 12 month period. General VAT taxpayers who meet the requirement are able to register as small-scale VAT taxpayers if they do so before December 31, 2018. Therefore, more taxpayers will have the option to be classified as small-scale taxpayers. These taxpayers enjoy a VAT levy rate of three percent, which is calculated based on sales with no deduction for input VAT. In some special business, such as sales/lease of real estate or providing labor dispatch service, the VAT levy rate is 5%.

Clayton & McKervey will continue to monitor China’s VAT system, and share any updates as they occur. In the meantime, contact us with specific questions on this topic.

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Nina Wang

Senior Manager, International Tax

As a member of the firm's international group with a focus on China, Nina specializes in international tax planning and compliance.

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